The G-20 Is The New UN

World markets loved the result of last Thursday’s G-20 summit in London. Stocks soared as the group vowed to regulate hedge funds, agreed to require banks to build capital and promised to provide $1.1 trillion to the International Monetary Fund and other multilateral institutions.

President Obama and George Soros both called the meeting a “turning point.” Analysts concurred: They told us that, as a result of the gathering, the world had changed “forever,” capitalism would never be the same again and a new era had begun.

Is that so? There was no deal on coordinating economic stimulus plans, the major pre-summit issue, and agreements reached were pale versions of earlier proposals. The post-summit communiqué, the product of months of work by officials from around the world, was both empty and vague.

Yet we should not be surprised. The G-20 confab, after all, included more than 1,000 officials representing multilateral institutions and more than 20 nations. With only four hours and 35 minutes of meeting time, leaders spoke for an average of 11 minutes in their own language, shook hands, posed for two group photos–neither of which includes all of them–and then dispersed. We know little was really accomplished because the biggest news from London was first lady Michelle Obama’s eye-catching attire and Queen Elizabeth’s scolding of Silvio Berlusconi, Italy’s irrepressible prime minister.

The most important news from the G-20 summit, however, was what did not happen there. There were two critical omissions. First, the G-20 did not address the underlying causes of the global downturn. The leaders found time to talk about tightening regulation of financial institutions–a classic locking-the-barn-door-after-the-horse-has-escaped exercise–but did not ask themselves about the structural reasons for the breakdown in regulatory mechanisms.

If they had thought about the structural concerns, they would have seen that regulation in the U.S. and elsewhere had been overwhelmed by massive liquidity flows. There were many factors contributing to the explosion in global wealth, but the major new one was the rapid accumulation of export earnings by China. These earnings had to be recycled abroad because Beijing maintained, among other mercantilist features, a fixed currency.

Yet the G-20 communiqué, as long as it is and as comprehensive as it purports to be, does not address this core issue. The London gathering thereby ignored the two biggest imbalances today: the Chinese current-account surplus and the American current-account deficit. There is little prospect for sustainable global recovery until these two imbalances are wound down, because China and the U.S. account for almost a third of the world’s economy.

The second major G-20 omission involves trade. The leaders promised $250 billion over two years for trade finance and agreed to avoid adopting protectionist measures until the end of 2010. These and other proposed measures, unfortunately, are inadequate. The London gathering did not strike a deal to conclude the Doha Trade Round or even set a date for resumption of discussions.

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